In the international market, there has been a large existence of monopolies, which have power in controlling prices existing in the market. A monopoly is a situation where a firm is the sole seller in the market (Sullivan 12). This indicates that there are no other sellers in the market offering the product offered by the monopoly. A monopoly gains advantage over other firms since there is less competition in the provision of commodities. The existence of only one firm that offers products gives the customers less power to bargain over the price of the commodities. In addition, this situation gives the monopoly the power to set a higher price. This does not affect the demand adversely since there are no substitutes in the market.
A monopoly uses certain strategies that help it to prevent competition in the market. These strategies create a barrier to other firms, thereby enabling the monopoly to maintain its power over its customers in terms of price setting. The barriers also reduce the probability of increased competition (Tirole 10). One of the barriers used is economies of scale. Large monopoly firms usually produce large units. This indicates that they require large amounts of inputs to produce large units of outputs. The firm will search for relatively cheap sources of raw materials. Most of the suppliers offer large quantities of raw materials at low prices. However, this does not apply for those who buy smaller quantities. The firm gains advantage since it purchases high quality materials at relatively lower prices than other firms. This enhances economies of scale, which prevents other firms from entering into the market.
The other barrier used by monopoly firms is the use of research and development. Many firms operating in the market do not invest in research and development. This has been cited as one of the reasons for their failure. Research and development enables monopolies to collect adequate information regarding product development (Markovits 10). This enhances effective innovation, leading to the production of unique products that are unmatched by other firms. The monopoly therefore gains advantage by producing an innovated product that has not been produced by any other firm in the market.
Cost advantage creates barriers to other firms in the industry. There are various ways in which the monopoly gains a cost advantage over other firms in the market. Firstly, the use of efficient ways of production enables the monopoly to reduce the overall cost incurred during the process of production. Secondly, some of the monopolies recycle materials to reduce the cost of raw materials.
Legal rights are very important in creating barriers for other firms in the market. Some of these include trademarks, patent rights and copyrights (Tirole 15). Patent rights give individuals or organizations the right to use an invention created by the original inventor. Copy rights give an individual the permit to produce the works of the original producers. Some of the monopolies are created by the government. The government gives exclusive rights in the production of a certain good or service within the region. This prevents other firms from producing the same commodity.
There are certain differences that can be viewed between the monopoly and other competitive firms in the market. For instance, the pricing in a monopoly market is determined by the seller. The price is usually set at a high level to guarantee super profits for the monopoly. The existence of barriers in the industry enables the monopoly to gain economic profits since there is no competition in the market (Sullivan 16). In addition, the barriers enable the monopoly to set a price that has to be paid by each customer since there are no substitutes. In a competitive firm, there are normal profits since the price set is attained as a result of demand and supply forces in the market. There are many competitors in this market. This creates various alternatives for the many customers. If one seller sets a high price, the customer has the option of buying products from other sellers offering low prices.
The demand curves of the two markets also differ. The demand curve in a monopoly market is downwards sloping. This implies that in order to set a high price, the monopoly will be forced to produce a lower quantity than competitive firms (Markovits 11). The demand curve of the competitive firms is a straight line that is parallel to the x-axis. This implies that the demand for the individuals in this market is equal to the price. The quantity produced by competitive firms is usually larger than the one produced by monopoly firms.
Efficiency is an important factor that shows the effectiveness of the monopoly. Productive efficiency is whereby resources are used in an effective way to produce desirable levels of output. In a monopoly firm, this form of efficiency is not achieved since there is little output produced due to less competition in the industry. In a competitive firm, it is achieved since there is competition and there is large production of units of output. Allocation efficiency involves the production of goods that are desirable in the entire society. This form of efficiency is not available in the monopoly firms. This is because these firms create a deadweight loss that affects the society negatively. In a competitive market, there is allocation efficiency since there are large quantities produced that meet the high demand.
In conclusion, the existence of monopolies creates both advantages and disadvantages in the society. One advantage is that the firm gains super profits, which falls within its objective of maximizing the level of profits. One disadvantage in a monopoly market is that it may lead to deadweight loss in the community. The legal authorities controlling monopolies should ensure that these firms do not set a price that takes advantage of the customers in a market. This will ensure that there is less exploitation of buyers in the market.
References
Markovits, R. Matters of Principle. New York: New York University Press. 2008. Print.
Markovits, Richard. Matters of Principle. New York: New York University Press. 2011. Print.
Sullivan, A. Economics: Principles in Action. Prentice. Prentice Hall. 2011. Print.
Tirole, J. The Theory of Industrial Organization. London. Palgrave Macmillan. 2010. Print.
